Home. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Adjustments transfer the cost of “used up” assets to expense.

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Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Adjustments transfer the cost of “used up” assets to expense accounts. Adjustments for changes in merchandise inventory are made directly to the Income Summary account.


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Describe the parts of a ten-column work sheet.

Generate trial balances and end-of-period adjustments.

Determine which general ledger accounts to adjust.

Calculate the adjustments.

Prepare a ten-column work sheet.

Journalize the adjustments.


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Key Terms

adjustment

beginning inventory

ending inventory

physical inventory

Identifying Accounts to be Adjusted and AdjustingMerchandise Inventory

Section 18.1

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Completing End-of-Period Work


Section 18.1

Managers, stockholders, and creditors

need to know net income and the value

of stockholders’ equity to make sound

business decisions.

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The Ten-Column Work Sheet


Section 18.1

Five amount sections in the ten-column work sheet

Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Balance Sheet

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Section 18.1 Trial Balance Section

Enter the account name and number for each account in the Account Name and Account Number columns.

Enter the balance in the Debit or Credit column.

Rule the Debit and Credit columns.

If the Debit and Credit columns are proven, draw a double-rule line across both columns.

See page 522

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Section 18.1

adjustmentAn amount that is added to or subtracted from an account balance to bring that balance up to date.

At the end of the period, adjustments are made to transfer the costs of assets consumed from asset accounts to the

appropriate expense accounts.

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Section 18.1

If a balance is not up to date as of the last day of the fiscal period, it must be adjusted.

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Section 18.1

Three Types of Inventory

BeginningInventory

EndingInventory

PhysicalInventory

beginning inventoryThe merchandise a business has on hand at the

beginning of a period.

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Section 18.1


BeginningInventory

EndingInventory

PhysicalInventory

ending inventoryThe merchandise a business has on hand at the

end of a period.

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Section 18.1


BeginningInventory

EndingInventory

PhysicalInventory

physical inventoryAn actual count of all merchandise on hand

and available for sale.

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Section 18.1

When calculating the adjustment for Merchandise Inventory, you need to know

The account’s balance

The physical inventory amount

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Section 18.1

Adjusting the Merchandise Inventory Account

Adjustment

To adjust the Merchandise Inventory account to reflect the physical inventory amount ($81,385), the following transaction is recorded.

See pages 524–525

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Section 18.1

Recording the Adjustment for Merchandise Inventory

In the Adjustments Debit column, enter the

debit amount of the adjustment on the Income

Summary line.

In the Adjustments Credit column, enter the

credit amount of the adjustment on the

Merchandise Inventory line.

1 2

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Key Term

prepaid expense

Adjusting Supplies, Prepaid Insurance, and FederalCorporate Income Tax

Section 18.2

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Adjusting the Supplies Account


Section 18.2

As supplies are used, they become expenses

of the business.

A physical inventory is taken at the end of the period to make an

adjustment to the Supplies account.

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Section 18.2


Adjustment

Record the adjustment for supplies.

See pages 527–528

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Adjusting the Prepaid Insurance Account


Section 18.2

Insurance premiums are an example of a prepaid expense.

prepaid expenseAn expense paid in advance.

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Section 18.2


Adjustment

Record the adjustment for the expiration of one-half month’s insurance coverage.

See pages 528–529

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Adjusting the Federal Corporate Income Tax Accounts


Section 18.2

When the exact

amount of

federal corporate

income tax is

determined:

Additional tax may need to be paid.

The company may qualify for a refund.

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Key Terms

adjusting entries

Completing the Work Sheetand Journalizing and Posting

the Adjusting EntriesSection 18.3

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Extending Work Sheet Balances



The amounts for each account must be extended to or carried over to these sections:

The Adjusted Trial Balance

The Income Statement

The Balance Sheet

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The balance of each Trial Balance

account is combined with the adjustments in the

Adjustments section.

The new balance is entered in the appropriate

Adjusted Trial Balance column.

If there is no adjustment, the

balance is transferred to the

same column in the Adjusted Trial

Balance section.

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Each account in

the Adjusted

Trial Balance

section is

extended to one

of the following

sections:

The Income Statement section, containing temporary account

balances

The Balance Sheet section, containing permanent account

balances

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Journalizing and Posting Adjusting Entries



Adjusting entries come from the Adjustments section of the work sheet.

adjusting entriesJournal entries that update the general ledger

accounts at the end of a period.

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Entries Recorded in the Adjustments Column

Adjusting Merchandise Inventory

Adjusting Supplies

Adjusting Insurance

Adjusting Income Tax

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Adjusting entries are recorded in the general journal

and then posted to the general ledger accounts.

This will cause the general ledger account balances to

agree with the Income Statement and Balance Sheet

sections.

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See page 538

Posting Adjusting Entries to the General Ledger

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the Adjusting EntriesSection 18.3 Posting Adjusting Entries to the General Ledger

See pages 537–538Home





See page 539

Posting Adjusting Entries to the General Ledger

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Question 1

After taking a physical inventory, you determined that the business has $132,755 of inventory on hand. The general ledger shows the Merchandise Inventory account with a balance of $139,400. What steps are needed to record the adjusting entry?

Step 1: The accounts Merchandise Inventory and Income Summary are affected.

Step 2: Merchandise Inventory is an asset account. Income Summary is a stockholder’s equity account.

Step 3: Merchandise Inventory is decreased by $6,645 ($139,400 - $132,755). This amount is transferred to Income Summary.

Step 4: To transfer the decrease in Merchandise Inventory, debit Income Summary for $6,645

Step 5: Decreases in asset accounts are recorded as credits. Credit Merchandise Inventory for $6,645.

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Question 2

Given the following information, determine what adjustments need to be made to the accounts. Indicate the amounts of the adjustments.

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Question 2

The adjustments that need to be made are shown below:

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Question 3

Explain the matching principle and why it is important to accounting.

The matching principle requires recording revenues in the period they are earned and recording expenses that were incurred to make those revenues in the same period. This may not be when expenses or revenues are paid or collected. By matching expenses and revenues, the matching principle provides an accurate measure of net income. For example, if you pay for (prepay) six months of insurance on one date, that expense is spread over the six months in which the policy is in effect. The cost of each month’s portion of the policy’s premium must be expensed in that month (1/6 of the total cost) so that records accurately reflect expenses. Having this information allows comparisons to be made for similar periods.

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Home. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Adjustments transfer the cost of “used up” assets to expense.

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